Danger Will Robinson: Rising Bond Yields Crush Semis and Force AI Valuation Reset – Try the Classic Marry Me Chicken

Things you need to know

• The bond market is speaking – is anyone listening?
• Semi’s get clocked….It’s the whole valuation ‘thing’ again.
• Investment Theme vs. Investment Calculus – Understand the difference.
• Oil up, gold down, bond yields holding steady.
• Try the Classic Marry Me Chicken

Danger Will Robinson, Danger! (A throwback to ‘Lost in Space’ a 1965-1968 CBS TV series – something the baby boomers can really appreciate) – stocks continued to be sold yesterday as investors considered what rising bond yields will mean for risk assets. Hint: It is changing the price of money and it’s creating an issue for valuations.

And that caused the indexes to end the day lower. The Dow down 116 pts, the S&P lost 53 pts, the Nasdaq gave up 355 pts, the Russell lost 40 pts, the Transports gave up 350 pts, the Equal Weight S&P lost 40 pts while the Mag 7 lost 310 pts.

And while that doesn’t appear to be a disaster, when you pull back the sheets you’ll find something very different. The semi’s got crushed…. (again!)

The Philadelphia Semiconductor Index fell 5% – as sellers (mostly traders & algos’) – went into a frenzy – tripping over each other as they ran for the exits…. unloading some of the hottest names in a very crowded trade – MU lost 7%, SNDK fell 9%, WDC gave up more than 7%, STX lost 9%, AMD down 4%, AVGO lost 3%, MRVL gave up nearly 8% while NVDA lost more than 2%.

And as you might expect – The Direxion triple levered Semi Long ETF lost 14.8%, but don’t despair- the Direxion triple levered Semi SHORT ETF rose by 15.3%. You see – there is always a silver lining…..

The Technology sector was the worst-performing S&P sector, down 2.5% followed by Industrials – down 1.5%.

The money that came out of semi’s did find opportunity in Financials up 0.5%, Consumer Staples up 1.1%, Energy up 1.8% and Healthcare up 1.6%. Further down the line – we also saw money move into Big Pharma up 2%, Biotech +0.4%. & Aerospace & Defense up 0.4%.

So, what happened to the semi’s? Did someone post something negative on Reddit? Did Mikey Burry announce that he was doubling down on his short bet? Did NVDA pre-announce ahead of earnings next week? Did the AI story suddenly fall apart? Did hyperscalers stop spending? Did demand for chips disappear overnight?

No, No, No and No. None of that happened.

What DID happen is that one of the hottest, most crowded trades on the Street ran smack into a wall — known as the bond market — and that is changing the investment calculus. And this is important because there is a difference between the investment theme and the investment calculus.

The investment theme is the fundamental story — the reason you own something in the first place. In this case, the AI theme remains enormous: AI adoption means massive data-center construction, which means more chips, more memory, more power and more infrastructure. And that means opportunity across the entire ecosystem — energy, natural-gas infrastructure, HVAC and cooling, the electric grid, construction and engineering, concrete and cement, steel, copper, building materials and real estate.

That theme did NOT change on Tuesday.

What changed was the calculus — the math investors use to decide what they are willing to PAY for that theme. That calculation includes expected earnings, growth, valuation, interest rates, risk, the cost of capital and what investors can earn somewhere else.

And THAT is where the bond market comes in.

Remember — the semi’s have been on fire. Memory names in particular have exploded higher, expectations are enormous and investors have been willing to pay up for tomorrow’s earnings because the AI buildout appears almost limitless.

But that buildout requires enormous amounts of capital. The hyperscalers issued about $121 billion of bonds in all of 2025. This year they have already issued nearly $200 billion and Street estimates suggest that number could reach $250 billion by year-end. Broaden it out to data centers, power, infrastructure and the rest of the AI ecosystem and AI-related debt issuance could approach $550 billion this year.

At the very same time Scotty Bessent is flooding the market with Treasury debt to finance trillion-dollar government deficits, the AI revolution is showing up at the bond-market window looking for hundreds of billions of dollars of its own. In the end – everybody wants capital. And bond investors are saying: Fine. But you’re going to have to pay me for it.

It’s Econ 202 — more supply means more competition for capital, more competition for capital means lower bond prices and higher yields, and higher yields mean a higher cost of money.

And THAT brings us right back to Tuesday’s semiconductor rout.

Because when the risk-free rate is pushing toward 5%, investors start asking much harder questions about what all of that AI spending will ultimately earn — and, more importantly, what they are willing to pay TODAY for earnings that won’t come for months or even years.

That doesn’t mean the AI theme is broken. It means the bond market is forcing investors to reprice it. And that is exactly what we have been discussing — the FED doesn’t necessarily have to do anything right now because the bond market is doing some of the work for them.

Higher interest rates don’t matter — UNTIL they do. Yesterday, they mattered.

Next up is oil…. WTI gained another 44 cts to settle at $84.94, while Brent added 15 cts to settle at $91.02. No need to rehash why- you know the story and it hasn’t really changed. Unrest and uncertainty in the middle east. Remember – oil doesn’t need another missile attack to stay elevated. It simply needs the uncertainty to continue. And right now, that uncertainty isn’t going anywhere. This morning WTI is up another 55 cts at $85.50.

Gold took a breather losing 1.8% or $81/oz to end the day at $4,335 and you can also blame the bond market for that too. Why? Because gold doesn’t pay you anything to own it, no earnings, no dividends, no interest, investors buy gold for safety – think geopolitical unrest (check), they buy it as an inflation hedge (check) and foreign central banks will buy gold to diversify reserves, reduce dollar exposure and hedge risk.

And here’s the rub – when US govt bonds offer you 4.7%, 5% or more, the opportunity cost of owning gold changes. Why buy a non-interest-bearing asset when you can put that same money into risk free treasuries that pay 5%? Oh, and that whole ‘safety’ trade theme – that went out the window at least for yesterday. This morning gold is trading at $4,342 and remains in the $4,160/$4,500 trading range.

Onto the eco data – which shouldn’t really be a surprise…Housing starts plummeted – falling 12.4% – well below the expectations of down 6%. Think affordability – Mortgage rates are moving up – current rates are like 6.7% and likely going higher. Think about it – higher rates just make home builders more cautious, because it causes buyers to step back so the decline isn’t really a surprise.

Now on the contra side of the eco data – the really interesting data point was the Manufacturing Production number – it came in on target at +0.2%…. And THIS is where the semiconductor story gets tossed upside down…..Manufacturing output rose in July, business-equipment production increased and production of semiconductors remained strong. HELLO????

Think about this – Investors were dumping semiconductor stocks yesterday while the economic data continues to tell us that the AI infrastructure buildout remains alive and well. Which reinforces the point – Yesterday wasn’t about AI demand suddenly disappearing, it was about the price investors are willing to pay for that growth when the cost of money changes. Ta Daaaaa! See how it all comes back to the bond market? And that is the second lesson today.

Eco data today is about Mortgage Apps – I suspect they will fall and the FOMC mins…. We discussed this – the surprise will be if we find out that more than just the 3 dissenters were ‘leaning’ hawkish – leaning meaning – they were on the fence – should we or shouldn’t we? Either way – it is what it is and we have 3 weeks before the next meeting, but first we have to get thru the August Jackson Hole boondoggle – that brings central bankers and economists from around the world to Jackson Hole, Wyoming….The theme this year –

“Financial Innovation – Implications for Payment and Policy”

Oh boy – Can you imagine the excitement in the room? LOL. I would not expect to learn anything about US monetary policy at this symposium, and you shouldn’t either.

Earnings today – EL, TGT & LOW’s all before the bell. That’s all about Personal Care/Beauty, Discount Retail/Consumer and Home Improvement Retail.

Over in Asia – South Korea continues to get sold – it lost 5.8% overnight, Taiwan lost 1.3% – but again BOTH market centers are still up by 54% ytd….so put it in perspective.

European Markets are churning around the unchanged line. Again – most of Europe is on vacation – earnings season is over and there are no central bank announcements.

US futures are churning as well…. Dow futures are up 7, S&P’s – 1, Nasdaq down 50 while the Russell – 6.

The S&P closed at 7691 – down 53 pts. Yesterday I said we were going to test near term support at 7700 – we did and we closed just a hair below…the chart suggests we are now in kind of purgatory – trendline support is down at 7520 and if bond yields continue to push higher – then a test of that trendline is more likely.

Remember – volumes are subdued, participants are away on vacation and moves can be exaggerated. Just look at what some of the double and triple levered ETF’s can do – which is not a recommendation at all – those products are not for the retail investor – they are sophisticated, they react swiftly and can cut deep if you don’t pay attention. On the other hand, they can handsomely reward you if you do it right…. The KEY – understand the RISK – period.

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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